Something Has the Kremlin Spooked… And It’s Not Reagan’s Ghost

For years, Russia’s state-owned energy giant, Gazprom (PINK: OGZPY), has been gouging Eastern Europe with high gas prices and one-sided contracts. It’s also used its position as the dominant supplier of gas to Europe as political leverage on behalf of the Kremlin.

And when the former Soviet satellite states fight back, all of Europe suffers with gas shortages in the dead of winter.

The good news is, the same shale boom that changed the energy landscape in the United States has reached European shores. And it’s undermining Gazprom and threatening Russia’s energy revenue.

Now, it’s true that Europe currently lacks the technology and infrastructure to develop its shale reserves. There’s also a stronger environmental lobby in Europe than there is in the United States. But that doesn’t mean progress in fracking activities is at a standstill.

For instance, Poland has granted 111 shale exploration licenses to companies including Chevron (NYSE: CVX) and Exxon Mobil (NYSE: XOM). In fact, Chevron has zeroed in on a geological anomaly stretching from the Baltic to the Black Sea called the Trans-European Suture Zone. The company is also exploring Romania and Bulgaria, and it recently won the right to negotiate a big shale gas contract in Ukraine.

This is a huge development, considering that Poland and Ukraine currently get 70% of their gas from Russia. Bulgaria, Finland, Belarus, Slovakia, Moldova, Georgia, Estonia and Latvia get all of their natural gas from Russia.

For decades they’ve been beholden to the whims of Gazprom, which has long been Russia’s Baltic enforcer. But now these countries have a chance to break free.

Of course, this is terrible news for Russia, which generates 60% of all state revenue from energy export customs. Defections will cost the country billions.

Granted, Europe is still a long way from eluding Gazprom’s grasp. But even now, the smaller European countries Russia’s bullied for so long are emboldened by their growing options. As a result, they’re attacking Gazprom through legal channels.

The EU is currently investigating Gazprom’s actions in eight countries: Bulgaria, Estonia, Latvia, Lithuania, Slovakia, Poland, Hungary and the Czech Republic. These countries have accused the company of using high gas prices as a penalty for shirking Moscow’s influence.

Accusations like this are nothing new. Back in 2005, Ukraine began a political shift away from the former Soviet Union toward the EU and NATO. In retaliation, Gazprom more than tripled the price it charged the country for gas.

Just two days after Ukraine joined the World Trade Organization, Gazprom cut off gas shipments entirely to Ukraine for a period of three days. Since 80% of Russia’s gas exports pass through Ukraine, gas volumes fell across Europe until the matter was resolved.

Of course, that resolution was only temporary. The scenario played out again in 2009, driving European gas supplies down to crisis levels. Russian gas deliveries to Italy fell by 80%, supplies to Greece were down 33% and Romania saw three-quarters of its Russian gas supplies disappear overnight.

Bulgaria, which relies on Russia for all of its natural gas, was ready to restart a shuttered nuclear reactor after two of its cities were left without gas on one of the coldest days of winter.

In both instances, Ukraine and others were forced to back down. But this time around it could be Gazprom making concessions.

The biggest issue to resolve in the EU probe? Whether or not the company is cheating by linking its gas prices to oil prices.

Gazprom has long linked its contract gas prices to the price of oil, since the two commodities were highly correlated at one point. But since the U.S. shale boom began, the two have sharply diverged. Oil continues to trade at historically high levels, while gas prices are the lowest they’ve been in decades.

So at the very least, the EU is trying to get Gazprom to take oil out of the gas price formula, something the company has refused to do. But more importantly, if the European Commission does find that Gazprom’s contracts breach EU rules, the company could be fined as much as 10% of its annual global revenue – about $15 billion.

The Russian government has already sprung to the defense of its champion. A decree signed by Russian President Vladimir Putin last week demanded that any foreign organization requesting information or contracts from Russian companies must now get permission from the Kremlin.

Still, measures like this won’t do much. Investigators have already collected a good deal of material, and they still have access to all of Gazprom’s partners and competitors in Europe.

It just goes to show how panicked Putin is. And rightly so.

If shale gas development gets off the ground and the European Commission wins its legal battle over Gazprom, Europe won’t have to worry about being left out in the cold ever again.

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